“Euro means end of NHS”

The European Central Bank has said that joining the Euro would mean the end of the free NHS, reports The Times (we do not link to the Times). Apparently the April edition monthly report of the ECB said that:

Governments should distinguish between “essential, privately non-insurable and non-affordable services”, such as emergency treatment, and those where “private financing might be more efficient”.

In truth, the actual ECB report[pdf file] does not say anything quite so bluntly. The actual report is full of careful conditionals and non-assertions: “governments may have to rise contribution rates”, such co-payments could increase efficiency”, “pre-financing [of geriatric care] has been proposed” and “It has been argued that setting of budget caps…can improve overall performance”. (page 45) Nonetheless, this report should be taken very seriously. It is the formal monthly report; not a mere research paper or discussion document, but the official view with the imprimatur of the body charged with running the Euro. Given the sanctity of free NHS provision in mainstream British politics, to have its underlying rationale brought into question by a multilateral institution of such power and influence is a political bombshell. We are not talking ‘Private Finance Initiative’ here; the ECB is suggesting that for most operations patients should arrange their own insurance voluntarily, pay up when they need it, or go without. In suggesting patient co-payments for operations, rather than mere privatisation of provision with continuing government funding, the report goes far further than anything suggested by the Conservatives.

Chancellor of the Exchequer Gordon Brown is due to report to Parliament on the ‘Five Tests’ for Euro membership shortly. Before then there will be a major Labour rebellion on Foundation Hospitals; giving hospitals slightly greater control of their own funds and services is already too radical for many MPs (including, with little concealment, Gordon Brown). This report is therefore also be an amazingly timed intrusion into that debate.

One can imagine the glee with which Iain Duncan-Smith will seize upon this report: he will be able to simultaineously portray the Foundation Hospitals policy as unduly timid, with the full weight of the ECB as ‘independent experts’, while also saying that the NHS is only ‘safe in Tory hands’ because of the government’s committment in principle to joining the Euro. After all the kerfuffle on IDS’ leadership in recent days, I shall be reserving my judgement on his capabilities to see whether he makes real capital out of this absolute gift from Europe.

The Conservative party does not wish to link European and domestic issues at the moment since they view the former as disturbing the public’s recent memories of Tory dissent.

Given that the ECB is aware of the delicacy of arguments over the Euro in Great Britain and the role of the NHS as a shibboleth in our politics, does the publication of such an article indicate a constituency for stability. Brown is on the record stating that the ECB should be reformed and this article may have been published in order to raise the costs of joining for Britain.

Interesting if it were true: an unwitting alliance of anti-euro campaigners in GB and ECB bureaucrats who wished to retain their current central banking structure.

…essential, privately non-insurable and non-affordable services”, such as emergency treatment…

makes no sense? (I assume the quote is accurate.) That is to say, services such as “emergency treatment” are the MOST insurable, because they are the least susceptible to adverse selection (in general; of course there are exceptions). It’s easy to underwrite, e.g., treatment for motor crash injuries, and everyone but, e.g., habitual drunks could afford suitable coverage. It’s the routine, predictable things (like diabetes in the elderly) which are *NOT INSURABLE* because they involve too small an element of chance. For such care other funding schemes (savings schemes, state subsidies to the poor, etc.) are necessary.

…services such as “emergency treatment” are the MOST insurable, because they are the least susceptible to adverse selection…

But they are susceptible to moral hazard, so it doesn’t necessarily follow that they are the most insurable.

I’m not even sure that it’s obviously true that they are the least susceptible to adverse selection: surely your chances of crashing your car must, to some extent, depend on your driving skills – which you will know better than your insurance company?

I think Andy Wood’s comment is very appropriate, so I beg leave to respond that (a) moral hazard is somewhat less of a factor in insurance for injuries or sudden illness than in, say, property insurance or insurance which might cover chronic health problems, because it takes a good deal of fraud (likely in connivance with doctors) or masochism to make an unwarranted claim for, say, a broken leg look convincing; (b) insurance companies can predict driving claims pretty well, well enough for reasonable underwriting–and we must remember that bad drivers can unilaterally inflict injuries on good ones; and (c) while of course personal predelictions (including choice of work or hobbies) play into chances of accident claims, premiums can be adjusted to these factors (directly, or by inference from claim history) fairly well.

The reason I feel so confident of my analysis that we have empirical evidence here (in the USA): it’s easy to buy accident insurance, and pretty easy (except in States with foolish “mandatory coverage” laws that prevent economically rational underwriting) to buy “major medical” coverage. On the other hand, coverage for “routine” medical care is (as insurance theory predicts) very costly.

moral hazard is somewhat less of a factor in insurance for injuries or sudden illness … because it takes a good deal of fraud (likely in connivance with doctors) or masochism to make an unwarranted claim for, say, a broken leg look convincing

But fraud has got nothing to do with moral hazard. Moral hazard is the reduced incentive you have to take precautions when someone else is covering your risk. Thus, when people insure themselves against burglary, they’re less likely to lock their doors.

How easy is it, in the US, to buy insurance cover for a heart attack? That’s an example of cover for emergency treatment which must be subject adverse selection.

Oh, sorry. The way I learned it, laziness is like “petit moral hazard” and fraud is “grand”… so to speak. Moral hazard subsists when the expected value of insurance exceeds the expected value of the covered loss. It induces laziness and fraud. Anyway, you’re right that people take fewer precautions when they’re insured. And in the extreme (culpable negligence rather than laziness) there certainly are examples of people who would rather have some insurance money (or some insurance-paid medical care) than their health (even though I think those folk are insane).

However, I still think that it’s easier to insure against surprises (car crash injuries, say) than certainties (routine medical concerns).

The answer to your heart-attack insurance question is complex, of course… because of our plethora of State laws and our system of employment-based insurance, but I would say it is pretty easy to buy insurance for heart attacks, subject chiefly to exclusions for pre-existing conditions (so if you’re already a fat, wheezing fellow with angina, insurance will be harder to come by). The “employment-based insurance” distortion is that employed people don’t usually buy “individual” insurance. Unemployed people are generally poorer risks, so rates for them are (and should be) higher. But our insurance sellers don’t ask about employment; they just lump all individual-policy buyers together. Which makes it hard to discover what the price of insurance for lower-risk individuals might be in the absence of the employment-based insurance system. That system is supported (enforced?) by tax rules that make employer-paid insurance much cheaper than individual policies (individual insurance must be purchased with post-income-tax dollars, but employer-paid insurance premiums are excluded from taxation. Well, leaving aside a bunch of pettifogging complexities.) The main State-law distortion is that some States forbid insurers to pay for heart doctors unless also they also pay for, e.g., acupuncture. I live in such a State (Washington, on the West coast of the USA). Still, a few years back I had my own business (in California, also a mandated-coverage State) and bought pretty broad insurance for a few hundred dollars a month.

In case that sounds “outrageous!” to you, note that it would not have been cheaper loaded into my tax bill, and might have been cheaper if the market were less distorted.

You know, I just made a bunch of sweeping statements. I stand by their essence, but I would like to concede, before anyone takes me to task, that I have breezed past a lot of details and exceptions. For almost everything I stated in general terms, someone could adduce specific counter-examples. I’m aware of a lot of these, I just don’t think they overpower my generalizations. If a really comprehensive analysis of the USA health-insurance market is required, well, I don’t think I can provide it in this space.

It doesn’t even have to be about laziness either. It can be about simply saving money – if I insure my house against being burnt down, all those smoke alarms, sprinklers and fire extinguishers which I would have bought otherwise are no longer worth the cost.

But I suppose I’m starting to nit-pick, amn’t I?

Moral hazard subsists when the expected value of insurance exceeds the expected value of the covered loss.

I don’t believe that that’s a necessary condition.

It’s sufficient that the expected value of the insurance minus the loss without the precaution exceeds the expected value of the inurance minus the loss with the precaution by an amount greater than the cost of the precaution. (That last statement is easier to express with algebra.)

So, even only part insurance can still create a moral hazard for a sufficiently expensive precaution which is nevertheless worth taking.

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